Declining global crude oil and petroleum product inventories prolong the energy supply chain crisis
Persistent shipping disruptions in Hormuz and the Red Sea constrain supply recovery despite higher oil output
U.S. inflation pressures intensify, while the EU even considers a “windfall tax” on oil and gas companies

The global energy supply chain crisis is dragging on. Rapidly declining crude oil and petroleum product inventories worldwide have weakened the market’s ability to absorb further supply shocks. Middle Eastern oil producers are accelerating efforts to increase production, but persistent shipping disruptions around the Strait of Hormuz and the Red Sea have limited the recovery in actual exports. The resulting rise in energy prices is spreading across production and transportation costs, steadily increasing inflationary pressures in major Western economies, including the United States and Europe.

A Warning from Saudi Aramco’s CEO

According to a Dow Jones Newswires report on the 12th, local time, Amin Nasser, president and CEO of Saudi Arabia’s state-owned oil company Aramco, said at the 25th World Petroleum Congress in Riyadh that day, “Disruptions to trade through the Strait of Hormuz and attacks on regional energy infrastructure have put every link in the energy supply chain to the test,” calling them “an unprecedented attack on the lifeline of the global economy, Saudi Arabia and Aramco.” He added, “Global crude oil supplies are under severe pressure,” noting that “surging refined product prices are exacerbating these difficulties.”

Nasser also assessed that rapidly declining crude inventories had effectively pushed the market’s capacity to respond to supply shocks close to its limit. “Commercial onshore oil inventories are currently well below 6 billion barrels, and they are the last remaining supply buffer,” he said. “What is more concerning is that the vast majority of this volume is effectively inaccessible.” He added, “The cushioning capacity provided by inventories has weakened to the point where it can barely be called a buffer,” stressing that “relying on inventories can never be a permanent solution for energy security.” Replenishing depleted inventories is also expected to take considerable time. “Pressure across the energy supply chain will intensify until the Strait of Hormuz fully reopens and market confidence is restored,” Nasser said. “It could take up to 2 years to meet demand while rebuilding inventories.”

Petroleum Product Inventories Also in Crisis

Similar warnings had been raised earlier at the Energy Intelligence Forum held in London, Britain, on the 5th. At the time, Nasser said, “The world entered this crisis with approximately 10 billion barrels of oil inventories, but roughly 3 billion barrels of crude supply have since been disrupted.” He added, “More than 1 billion barrels have been released from inventories to ease these supply disruptions, most of which came from commercial onshore stocks,” and said, “The global energy supply system is already under considerable pressure, with extremely limited capacity to absorb any further shocks.”

Concerns about inventories are also emerging in the petroleum products market. Russell Hardy, CEO of Switzerland’s Vitol, the world’s largest independent energy and commodities trader, said at the Asia Pacific Petroleum Conference in Singapore last month, “The petroleum products market is extremely tight and inflexible,” adding, “Global petroleum product inventories are still declining and are close to rock bottom.” He stressed, “Not enough refining capacity is operating yet to halt the inventory decline,” and “Surplus volumes around the world are continuing to be depleted.” Petroleum product exports from the Middle East and Russia are each declining by 2 million barrels a day, underscoring concerns that the crisis in petroleum products is even more severe than that in crude oil.

Oil Producers Step Up Output

Meanwhile, major Middle Eastern oil producers are accelerating efforts to increase crude output. According to the latest report from the Organization of the Petroleum Exporting Countries (OPEC), Iraq’s crude production averaged 3.92 million barrels a day last month, up 386,000 barrels from the previous month. Output in the United Arab Emirates (UAE) rose by 86,000 barrels over the same period to 3.917 million barrels a day, while Kazakhstan’s production increased by 22,000 barrels to 1.851 million barrels a day.

Saudi Arabia’s crude output also rose by 744,000 barrels from the previous month to an average of 8.001 million barrels a day last month. This accounted for approximately 78% of the overall OPEC+ production increase of 956,000 barrels a day over the same period. However, it amounted to only about 76.4% of Saudi Arabia’s production target of 10.478 million barrels a day for last month, leaving a shortfall of 2.477 million barrels a day. A combination of setbacks, including prolonged maritime shipping disruptions and damage to the East-West pipeline, appears to be slowing the recovery in supply capacity.

Table 1. Average Daily Crude Oil Production by Major Oil-Producing Countries in September

Houthi Offensive Adds to Saudi Arabia’s Burden

Recently, Houthi rebel airstrikes have also become a major strain on Saudi Arabia’s crude oil supply chain. After declaring a maritime blockade of Saudi Arabia in July, the Houthis said they had attacked 2 Saudi oil tankers sailing in the Red Sea. At the time, the Houthis controlled territory near the Bab el-Mandeb Strait at the southern end of the Red Sea. Later that month, they also claimed to have struck Aramco oil facilities in Yanbu and Jizan on the Red Sea coast with missiles and drones, or attacked crude oil supply and transportation facilities linking Saudi Arabia’s eastern oil fields with Yanbu.

This month, the scope of the attacks expanded to major infrastructure on Saudi territory. According to foreign media reports, the Houthis carried out successive attacks on King Khalid International Airport in Riyadh and Abha International Airport in the southwest on the 6th and 7th, killing a total of 3 people and injuring 36. On the 8th, King Khalid International Airport was struck again by a cruise missile, killing 3 Saudis and damaging 1 aircraft belonging to state-owned Saudia. On the 10th, an airstrike targeting the same airport killed 12 people and injured 309. On the 11th, a projectile struck an airport passenger terminal, killing 1 person and injuring 11. On the 13th, a Houthi attack on Aramco’s headquarters in Dhahran, eastern Saudi Arabia, also caused a fire.

Major Western Economies Reel from Surging Oil Prices

As the energy shock originating in the Middle East persists, continued oil price increases are intensifying inflationary pressures in major economies. For example, the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) announced on the 15th that last month’s producer price index (PPI) rose 1.3% from the previous month. This was 0.7 percentage points above market expectations and the largest increase in 4 years and 6 months, since March 2022. The year-on-year PPI increase was 6.3%, also well above the market forecast of 5.5%. Energy prices were the main driver of the surge in producer prices. U.S. final-demand goods prices rose 2.6% month on month last month, the largest increase since the series began in December 2009. Energy accounted for more than 80% of the increase, with gasoline prices in particular jumping 20.3% in just one month.

The U.S. Federal Reserve (Fed) is closely monitoring these inflationary pressures. Its recently released October Beige Book stated, “Higher oil prices permeated all districts,” adding, “Businesses reported elevated diesel prices and said fuel surcharges were passing costs through the entire supply chain.” The Beige Book is a report compiled by the 12 regional Federal Reserve Banks based on information about recent economic developments gathered through contacts with banks, businesses, experts and others in their districts. The Fed explained, “Businesses in several districts cited continued uncertainty surrounding energy and tariffs,” adding that they “expected prices to rise further over the coming months as existing contracts expire and they have to renegotiate contracts for their own inputs and deliveries to customers.”

The European Union (EU) is even considering imposing a so-called “windfall tax” on oil and gas companies that have earned massive profits from surging oil prices. According to a Reuters report on the 12th, Wopke Hoekstra, the EU commissioner responsible for climate and taxation, said the European Commission would establish a working group to examine the pros and cons of an EU-wide windfall tax on oil and gas companies. In an interview with Reuters, he said, “Citizens, particularly vulnerable groups, are facing sharp increases in energy bills,” and noted, “Some companies are reaping excessive profits from global turmoil without providing additional services or products.” He added, “Many citizens and politicians feel this is unfair,” explaining that there was shared support for the rationale behind introducing a windfall tax.